CCTV News: Inflation and S&ED

This morning I was on CCTV News BizAsia. You can watch the two short interview clips by following the links. In the first segment, I gave my take on China’s economic figures for April, which were released today. The Consumer Price Index (CPI) rose 5.3% year-on-year (compared to 5.4% in March), suggesting that inflation remains a real concern, despite China’s efforts to tackle the problem using price controls. I also noted that the essentially balanced trade that China ran in the first quarter gave its central bank some breathing space in trying to rein in the growth of the money supply. But the trade figures released yesterday, which showed China running a surprisingly large $11.4 billion trade surplus in April — will put more pressure on the PBOC to continue tightening, or allow the RMB to rise in value.

In the second interview segment, I discussed the main takeaways from the latest round of the Strategic and Economic Dialogue (S&ED) between China and the U.S., which took place this week in Washington, DC. For those interested in a longer (half hour) discussion on this topic, you can also watch my appearance on last night’s episode of Dialogue [when the program is posted online, hopefully in the next 24 hours, I will post the link here]. My fellow guests on the program were Professor Xiao Geng, director of the Columbia Global Center in Beijing, and Professor Zhang Chuanjie, deputy director of the Tsinghua Center for US-China Relations.

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I really don’t understand why China’s policiy makers are not revaluing more quickly. We all seem to think it is about protecting employment in exporting industries. But appreciation in the RMB should make the base commodities that China imports cheaper, providing a savings on inputs. (Of course, it also serves as an inflation attenuator.)

We seem to just chalk it up to powerful political interest in the Ministry of Commerce and strong generalist support. But I wonder if there is not something else going on.

Raising interest rates is not as effective a tool (as you pointed out in prior posts. An unattactive outcome will be that rate rises are going to make a lot of SOEs unprofitable, especially when they bring the additional capacity that they have been building online and no longer can capitalize the interest expense on those fixed asset loans. Even the superficial analysts that populate the mainland banks won’t be able to ignore the red ink, which could cause further puckering by the Chinese banks, causing more liquidity pressure on many commercial enterprises. Facing this, one would think they would opt for more aggressive revaluation.

One thing I am curious about is the relative size of the middle class in China. Do you know where I can find information? My sense is that you can have a significant consumer market in China, easily the size of the US while concurrently having a huge part of the population well below the poverty line, unable to afford basic necessities. Are we seeing in China the development of a monied class of say 300 million (SOE employees, private export firms and the occasional connnected Privately owned enterprises) while the other 1 billion toil for substandard wages?

While there is no denying the material growth in the middle class, is the trajectory still there?